November 12, 2018 / 5:48 PM / 6 months ago

YOUR MONEY-Sustainable investing's secret weapon: Public pensions

 (The writer is a Reuters contributor. The opinions expressed
are his own.)
    By Chris Taylor
    NEW YORK, Nov 12 (Reuters) - Administrators of some of the
country's largest public pension funds have decided they are
interested in sustainable investing - and the financial industry
is listening.
    Investing with a focus on environmental, social and
governance issues - known as ESG - now amounts to $12 trillion
in the United States, according to a new report from the
nonprofit US SIF: The Forum for Sustainable and Responsible
    That amount has increased 38 percent in two years, with much
of that driven by big institutional investors with big dollars
to manage.
    CalPERS, for example, manages $344 billion for California's
public employees while CalSTRS invests $229 billion for the
state's teachers. New York State's Common Retirement Fund
manages $207 billion and New York City Retirement Systems, $195
billion, just to name a few.
    The No. 1 ESG issue for big money managers right now is
climate change, according to the US SIF report. That means they
are moving big blocks of money into investments that are taking
a responsible approach to the environment. They also weed out
so-called bad actors from their lists - or encourage them to
change their ways.
    Money managers who make decisions about where to invest can
address these issues with either ESG-specific funds - Parnassus
Core Equity           is a prominent example that is available
to retail investors - or as an umbrella strategy that governs
their whole portfolio, like CalPERS.
    "We are integrating sustainable investing thinking into all
our research, decision-making and engagement with companies,
helping them think about environmental and social topics,"
said Beth Richtman, managing investment director for CalPERS'
sustainable investment program.
    In the past, ESG investing may have been a niche approach -
but not anymore. 
    The CFA Institute surveyed portfolio managers of all types
and found that 73 percent took ESG issues into account in their
investment processes. 
    Governance issues - like having talented, independent board
members, and executive pay that is reasonable and not runaway -
ranked highest, followed by environmental and social issues.
    That shift toward ESG is not, however, without controversy.
    The debate is: should funds invest sustainably, with an eye
to environmental and social factors, or should returns be their
sole obligation?
    An example: In 2000, CalPERS made the decision to divest
from tobacco companies, whose stocks have since then enjoyed
above-average performance. That move is said to have sacrificed
billions of dollars in lost returns. 
    "That's bad for one of the most underfunded pension plans in
the nation," said Chris Burnham, a former vice chair of Deutsche
Asset Management and president of the Institute for Pension Fund
    But sustainability advocates say that you can do well by
doing good. Companies taking ESG issues into account tend to
have better financial outcomes, said CalPERS' Richtman.
    "Part of making money is understanding the array of risks
and opportunities that are out there. Environmental, social and
governance risks are part of those considerations for every
portfolio manager," she said.
    Some big pension funds are going a step further than just
investing by actively engaging and nudging companies in a more
sustainable direction. 
    For instance, CalPERS is one of the founders of the Climate
Action 100+ movement, a group of investors trying to get the
world's worst carbon emitters to clean up their acts.
    "Large institutional investors like Calpers have been at the
forefront of a lot of initiatives like this," said Matt Orsagh,
director of capital markets policy at the CFA Institute, which
has released multiple reports on ESG investing. "They were first
adopters, and sometimes they got a lot of pushback. Now that's
not the case."
    In fact, 10 years down the road, we won't even be using the
acronym ESG anymore, predicted Orsagh. By then, it will just be
a part of fundamental analysis - portfolio managers doing their
    "It's a big culture change, and it's happening right now,"
he said.

 (Editing by Beth Pinsker and G Crosse)
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